Infoblox's CEO Discusses F2Q13 Results - Earnings Call Transcript

Feb.21.13 | About: Infoblox Inc. (BLOX)

Infoblox Inc. (NYSE:BLOX)

F2Q13 Earnings Call

February 21, 2013 4:30 pm ET

Executives

Jane Underwood – Senior Director-Investor Relations

Robert Thomas – President and Chief Executive Officer

Remo Canessa – Chief Financial Officer

Analysts

Sanjit Singh – Wedbush Securities, Inc.

Jonathan Ruykhaver – Stephens Inc.

Justin Jordan – Goldman Sachs

Kimberly A. Watkins – Morgan Stanley & Co. LLC

Amitabh Passi – UBS Securities LLC

Erik Suppiger – JMP Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Infoblox Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to our host, Ms. Jane Underwood. Please go ahead.

Jane Underwood

Good afternoon, and thank you for joining us to discuss Infoblox’s financial results for the second quarter of fiscal 2013. With me on today’s call are Robert Thomas, our President and Chief Executive Officer; and Remo Canessa, our Chief Financial Officer.

By now, everyone should have access to our earnings announcements, which we released this afternoon. This announcement may also be found on our website at www.infoblox.com in the investor relations section.

Before I turn the call over to Robert, let me remind you that the presentation we’ll be making today includes forward looking statements. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward looking statements.

For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on December 4, 2012.

For the sake of clarity, unless otherwise noted, all numbers we will talk about today will be on an adjusted non-GAAP basis. Please refer to the tables in our press release in the investor relations portion of our website for a reconciliation of GAAP to the non-GAAP numbers we will be discussing.

Now, I’d like to turn the call over to Robert.

Robert Thomas

Thank you, Jane. Good afternoon. Infoblox delivered an outstanding second quarter, achieving record top line results. Revenue drew to $54.4 million, up 32% year-over-year and 10% sequentially. Product revenue increased 31% year-over-year and our services and support revenue was up 32% year-over-year.

All major geographic regions performed at or above the expectations and we continued a high rate of new customer acquisition. In the quarter we saw healthy growth from NetMRI appliances, which increased 24% year-over-year. We also reported solid profitability in the quarter. The total gross margin was at 80%, operating margin at 7% and earnings per share at $0.06. From a products perspective, we introduced two new security solutions, Trinzic 100 Network Edge appliance. These three new products expand our total addressable market and to create more sales opportunities within our existing customer base. These products also deliver on our strategy to create a central control point within our customer’s networks for greater efficiency and security.

I will further discuss these new products a little later on the call. We also noticed analysts and investors about the size and penetration of the DDI market. We believe the market is significantly underpenetrated and the need for commercial grade DDI solutions is gaining strong momentum. We are very confident that there is tremendous growth ahead for us in this market. Our leadership position and customers deployments and our pipeline support these beliefs.

Now, I’d like to turn the call over to Remo to further discuss our financial results.

Remo Canessa

Thank you, Robert. I would like to remind everyone that the results I will be discussing are non-GAAP financial results, and exclude stock based compensation expenses, amortization of intangibles, and the tax impact of these adjustments. All share counts that I’ll be providing will be on a fully diluted weighted average share basis.

We are very pleased to report another strong quarter. Revenue in the quarter grew to $54.4 million which represents a 32% increase over the January quarter last year and a 10% increase over the October quarter. Product revenue in the quarter was $30.8 million or 57% of total revenue, which increased 31% from the January quarter last year and was up 14% from the October quarter.

Service and support revenue was $23.6 million or 43% of total revenue, an increase of 32% over the January quarter last year and 5% over the October quarter. The increase in our service support revenue is primarily due to our growing install base of customers with prepaid support contracts that amortize over the service period.

From a geographic perspective, in the quarter Americas grew 36% over the January quarter last year and 5% over the October quarter, representing approximately 63% of total revenue. EMEA revenue increased 35% over the January quarter of last year and 27% over the October quarter representing approximately 27% of revenue.

APAC revenue increased 2% from the January quarter last year and 1% over the October quarter, representing approximately 10% of revenue. Product gross margin was 78% in the January quarter compared with 80% in the January quarter last year and 80% in the October quarter. As we have discussed in the past, virtually all of our DDI appliances are in the new platform which carry a lower gross margin.

Service and support gross margin was 82% for the January quarter compared with 80% in the January quarter last year and 82% in the October quarter. As a result total gross margin in January quarter was 80% compared with 80% in the January quarter last year and 81% in the October quarter.

In the January quarter, total operating expenses were $39.6 million which is an increase of $8.6 million compared with the January quarter last year. As a percent of revenue, operating expenses decreased to 73% from 75% in the January quarter last year. On a year-over-year basis, R&D increased 10% and was 17% total revenue compared with 21% last year.

Sales and marketing increased 33% and was 47% of revenue compared with 46% last year. G&A increased 44% and was 9% of revenue compared with 8% last year.

In the January quarter, total operating expenses increased sequentially by 8% from the October quarter. On a quarter-over-quarter basis, R&D increased 5%, sales and marketing increased 12%, and G&A decreased 5%. The increase in sales and marketing is due to an increase in headcount and in compensation expenses, and to a lesser extent, higher expenses from marketing activities primarily related to our three new product introductions. At the end of January quarter, our worldwide headcount was 541 employees.

Operating margin for the January quarter was 7% compared with 4.9% in the January quarter last year, and 6.9% in the October quarter. The operating margin performance in the quarter was better than expected, and is due to exceeding our revenue and gross margin targets, along with operating expenses decreasing as a percent of revenue.

Net income in the quarter was $3 million or $0.06 per share. This compares to net income of $1.6 million or $0.04 per share in the January quarter last year. In the October quarter, net income was $3.1 million or $0.06 per share.

As of January 31, 2012, we had $180 million in cash, and cash equivalents, and short term investments. We had net cash provided by operating activities of $8.9 million in the January quarter.

Total net deferred revenue increased by $15.1 million, when compared to January quarter last year, and a $7.9 million increase since the end of the October quarter. Deferred revenue primarily represents support contracts that amortize over the contract period, and to a smaller extent, channel inventory.

Now, I’d like to provide guidance for April quarter and our fiscal 2013 year. As a reminder, these numbers are all non-GAAP, which excludes stock-based compensation expense, amortization of intangibles, and the tax impact of these adjustments.

For the April quarter, we expect revenue to be in the range of $55 million to $56.5 million or a year-over-year growth of 27% to 30%. We are targeting gross margin to be approximately 78%. We anticipate operating margin to be between 6% to 7%, and we expect the EPS to be between $0.06 to $0.07 using 54.1 million shares.

Our fiscal year 2013, we expect revenue to be in the range of $216 million to $219 million or a year-over-year growth of 28% to 29%. We anticipate operating margin to be between 6% to 7% and we expect the EPS to be in the range of $0.21 to $0.26 using 53.8 million shares.

In closing, we are clearly pleased with our January quarter results and our overall execution. Our strong product portfolio positions us well in the market and we are investing further to accelerate the adoption over automated network control offerings.

Now I’d like to turn the call back over to Robert.

Robert Thomas

Thank you, Remo. At Infoblox, our mission is to deliver solutions that solve an IT organizations networks challenges and provide compelling business value. In the second quarter, we have several customer wins that illustrate that very point. I’d like to take a moment to highlight just three.

The first customer is a global SaaS company, an important business driver for this customer was in automating the deployment of pods, from which they provide customer facing applications over the Internet. These pods, which are essentially mini data centers contain application service, storage and networking devices needed for these applications. These mini data center approach allows them to quickly scale to meet customer demand while maintaining application performance. Previously, it took this customer six weeks or more to build each pod, because the process was labor intensive, and require close collaboration from a variety of teams. I needed to reduce the deployment time down to one pod per week to meet their business goal of 50 deployed in a year.

As phase I these customer integrating at Trinzic and NetMRI appliances to manage IP addresses provide DNS capabilities, and capture network data that’s critical to successful automation. As a result, we should significantly reduce the deployment time for the pods. We believe these customers who are using for pods traditional phase deployments including Internet facing DNS and further automation capabilities, the network configuration and change management.

The second customer is the prestigious U.S. University, which was interested in migrating from various legacy tools through commercial grade DDI solution. This University’s campus of network operations want to move from their legacy Alcatel-Lucent QIP solutions, primarily to make growing BYOD demands from students, faculty and staff.

At the same time, the School of Medicine want to migrate from the Microsoft DDI solution due to security and network availability issues as well as gain IPAM automation capabilities. As part of the sales process, I have taken through team created of scientist migration sites data and demonstrated how easy just to move converted data from QIP and Microsoft to Infoblox. By integrating DDI and Switch Port Manager have deployed a single platform for IPAM that addresses both of their issues.

Going forward, as solutions will help to manage approximately 2000 network devices and provide real time automation capabilities for over 120,000 IP addresses.

The third customer is a large partner of defense agency whose network is so strategic as literally classified as a weapon system. This customer needed to automate its network infrastructure to provide centralized control, and deliver the highest network uptime to support their global operations. This customer want to achieve the highest-end as possible to secure its DNS infrastructure. Their network is so large that without our unique group based central management, automation and high availability features, they lack the ability to secure every end point world wide. This global deployment is probably one of the largest DNS signing compliant solutions and will support over 300 locations.

A critical driver of closing this business was our recent common criteria level 2certification. Infoblox is the only DDI vendor to achieve this certification and it further differentiates us from our competitors. This customer example also undisclosed the opportunities we have within the federal government, and a strong value proposition we deliver to our agencies with mission critical networks. Federal agencies must improve network services and security with limited and also in shrinking budgets.

We have extensive experience meeting the requirements of civilian military, defense and intelligence agencies. Our purpose-built appliances have passed very rigorous security compliance testing and support government standards including many IT governance mandates. As mentioned earlier in the second quarter we made three significant additions to our product portfolio, which include two new security solutions.

Our expansion to the security market is a natural extension for us, and many of the networks services we have traditionally managed the customers such as DNS, DHCP and IPAM are critical services that can cause severe network disruption if they are targeted by hackers. The first new security product is our DNS Firewall, which leverages our DNS technology and expertise in securing and maintaining the integrity of an organization’s DNS infrastructure, the acceleration of BYOD devices in the web place, DNS has become a target for new class of malware entering the network, bypassing a traditional firewall. Once inside of network, malware can get undetected by legacy security approaches, and exploit DNS as a pathway to connect to a malicious destination or a botnet controller.

Our revolutionary firewall is the industry’s first internal DNS security solutions, which proactively protects against DNS based malware. Where malware code or a user attempts to make a malicious connection, the Infoblox DNS Firewall is designed to prevent the connection from happening, pinpoint the infected device, and alert the IT team, so they can take the appropriate action. The second product which is Infoblox Security Device Controller, which leverages a Network Automation technology discovery engine. This solution controls the rules that enable will restrict access through the network across the multivendor security devices such as firewalls, switches or routers.

The Security Device Controller helps network security teams keep paced with the volumes and complexity of policy changes needed to maintain a secure IT environment. This solution translates complex and vendor specific languages into an easy-to-understand view, reducing the reliance on senior engineers. without solution, our network administrator can write or change a rule, validate the change, check it against the policy, and automatically apply the changes in the language of the security devices.

By using this solution, organizations with a high volume of rule changes will save significant time and resources as well as ensure accuracy and improve security. The Security Device Controller is initially supporting Juniper and Cisco security products and we plan to add support to other vendors in subsequent releases.

So the third product is the Trinzic 100 Network Edge Appliance, this is the low-cost easy-to-deploy DDI appliance designed for branch offices, retail stores and other remote enterprise locations with a light IT footprint.

The Trinzic 100 allows us to extend that network control capabilities with customers right to the edge of their networks. This appliance can integrate with their customers existing Infoblox good infrastructure, but also functions as an independent devices that maintains local network services, if remote location loses LAN connectivity.

In order to accelerate the modest awareness of these new products, we’ve conducted multiple worldwide marketing events, activities and sales campaigns with both customers and partners. We participated at Cisco Live in London and we’ll be at next week’s RSA Conference in San Francisco, giving us exposure to combine total of 18,000 plus attendees.

In closing, we have an impressive quarter and are entering the second half of our fiscal year with great momentum. Our total addressable market is expanding and we are creating further sales opportunities within that 6,300 plus customer base. Looking forward, we are very excited about that business, our products and our strategic direction.

With that, Remo and I would be happy to take your questions.

Jane Underwood

Thank you, Robert. That concludes today’s prepared remarks. Operator, we would now like to open up the call to analyst questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Jane Underwood

Scott?

Operator

We have a question from the line of Sanjit Singh. Please go ahead.

Sanjit Singh – Wedbush Securities, Inc.

Hi, can you guys hear me?

Remo Canessa

Yes.

Robert Thomas

Yes, we can.

Sanjit Singh – Wedbush Securities, Inc.

I think that’s been a great quarter.

Robert Thomas

Thank you.

Sanjit Singh – Wedbush Securities, Inc.

I wanted to see if you guys go through some of the dynamics of the quarter and talk about linearity. Do you see any weakness in any particular month? And were there any large outsized large deals, maybe 10% deals or large customers, in terms of the kind of dynamics for the quarter?

Robert Thomas

Yeah. Linearity was outstanding during the quarter, we typically have our best linearity in the January quarter, and this quarter was no exception, and December was a large month for us in the bookings, and shipments and revenue. And there’s no 10% customer.

Sanjit Singh – Wedbush Securities, Inc.

And no 10% customer, great, and then following the gross margin that came in slightly above the 78% target, are you guiding again to 78% gross margin, can you just talk about some of the puts and takes on why gross margin would go down sequentially?

Remo Canessa

I will, we’re introducing as Robert mentioned a few new products in the third quarter. We do expect to have some revenue from our low-end edge product that low-end edge product carries overall gross margin in the mid 60% of that range. So that coupled also with services and support margin coming in high in Q2, there about 82% we expect our support margin to come in the lower 80% range in Q3.

Sanjit Singh – Wedbush Securities, Inc.

Great. And then my final question with the 3D product that you’ve announced this quarter, in terms of being a material porion of revenues, is that 2013 event or was 2013 event?

Remo Canessa

I would say further out 2013.

Sanjit Singh – Wedbush Securities, Inc.

Great, thank you.

Remo Canessa

Thank you.

Operator

Jonathan Ruykhaver of Stephens Incorporated. Please go ahead.

Jonathan Ruykhaver – Stephens Inc.

Yes, good afternoon, and congratulations on the strong execution, Robert and Remo.

Robert Thomas

Thank you.

Jonathan Ruykhaver – Stephens Inc.

Can you share with us anything that you can – anything that gives evidence to some of the adoption trends in your market? The sequential license growth last two quarters would indicate that you're seeing an expansion in activity. So any comment around sales cycles, close rates, that demonstrate maybe, the sales cycle is becoming less push and more pull. And are you seeing DDI as an item within budgets this year or is it still a struggle to find funding for DDI initiatives?

Robert Thomas

I don't think we are seeing really much of a contraction of sales cycles. I think maybe it's drifting down a little bit. But nothing yet that we could put a stake on the ground and claim that sales cycle are shrinking significantly. We didn’t see the competitors as strongly as we did last quarter – as we have in the past. So Q2 competitors are little bit weaker I think, but again nothing that you could say was a good sign of a trend or anything. So a little bit of weakness and competitors will see what happens this quarter. And no DDI in budgets yet but it’s definitely becoming more top of mind, people are realizing that everything they are doing in their networks today and everything they are adding to it and the complexity of them, that it’s important to get this path rock solid first. And help in automation as well through other parts of the network. So there is generally a growing awareness that this is an important problem to solve. So hasn’t yet reached the point where there is a line item in the budget but maybe next year we’ll see.

Jonathan Ruykhaver – Stephens Inc.

Are you seeing anything that would suggest the increasing complexity in the network is driving out Internet failures and companies are recognizing, at some point, that a DDI could be a solution to that problem?

Remo Canessa

Kind of an answer adjacent to that. We saw a lot more awareness in the quarter of the vulnerability of DNS to hackers, and I think there was quite a bit of press coverage still in the last three or four months about DNS being used as a vehicle for people to get inside the organization, then start pushing information out. This is definitely a strong awareness in the world today I think in IT that DNS is one of the new methods hackers are using to breach organizations. So that's definitely growing an awareness.

Jonathan Ruykhaver – Stephens Inc.

Okay. And one final question I have is, was there any particular vertical that stood out in the quarter?

Robert Thomas

No, it was consistent to prior quarters. The service provider and government are in the low mid-teen type area, then the rest is basically enterprise.

Jonathan Ruykhaver – Stephens Inc.

Are you seeing the 4030 DNS caching product driving any revenues at this point or is it still early in that cycle?

Robert Thomas

No we took quite a few orders for the 4030 in Q2 and exceeded our expectations. So we delivered and shift more 4030s than we had expected to do. So that is starting to get some traction.

Jonathan Ruykhaver – Stephens Inc.

Okay. That's good to hear. All right. I'll get back in the queue. Congratulations, once again

Robert Thomas

Thank you.

Remo Canessa

Thank you.

Operator

Kent Schofield of Goldman Sachs please go ahead.

Justin Jordan – Goldman Sachs

Hi. This is Justin Jordan filling in for Kent. Can you talk about what drove the large quarter-over-quarter deferred revenue growth? And, also, you mentioned that you don't see competitors as much as you did in the prior quarters. And can you give us more color on that, and maybe an update on the competitive dynamic with solarwinds and where you see them in the market.

Remo Canessa

I’ll take the deferred revenue question, typically our January quarter is our largest quarters for renewal, which was the case in this quarter. If you take a look at past January quarters, you’ll see the deferred revenue balance increases the most during that quarter or this quarter. And so this is similar to other quarters.

Robert Thomas

On the competitive front, as I said we did see competitors not participating quite as strongly or broadly as we had in the past. As I said, it’s only something we’ve seen in this year that we’ll see for this into the next few quarters hopefully so. So there’s a little bit less pressure, we didn’t see them quite as often and we maintained a win rate. We really see SolarWinds in our accounts as a pure competitor, most of the customers we sold to have some kind SolarWinds products in their organization. But we generally sell to a different level that SolarWinds product you generally sell to a different level that SolarWinds product you generally sold to the like admin guys to help them do their day to day job and make it lot a bit easier and making bit more productive as we generally sell more of a system wide basis, where larger deployments and more widely spread. So we sell to a different buying center in the organization and see very ratable SolarWinds so far.

Justin Jordan – Goldman Sachs

Okay, thank you.

Operator

Ehud Gelblum of Morgan Stanley, please go ahead.

Kimberly A. Watkins – Morgan Stanley & Co. LLC

Hi, it’s actually Kim Watkins for Ehud today. Wanting to ask you a question about NetMRI, I thought that was a pretty interesting data point that you gave that revenue is up 24% year-over-year, but I was just hoping you could help us frame now, because it seems like it’s going a little bit slower than the rest of the product revenue, what is the penetration of that product in your existing customer base. Are you happy with the pace it’s going? And what do you see in your pipeline?

Robert Thomas

We’re happy with the pace it is going. I think as we said many times before, the Netcordia acquisition was really an acquisition for the technology that was in the Netcordia product and NetMRI and for example, the Security Device Controller, a product that we released last quarter had NetMRI technology in it as part of the discovery mechanism for finding firewalls and security devices on the network. And it is a growing business and as we said, we grew 24% over the previous year with NetMRI. We are finding more interest in our existing customer base for that product and I think one of the customers we mentioned last quarter that both products NetMRI and DDI product as well. So I think they’re satisfied with the way things are going, it has a two-fold approach for us, it’s a product that stands alone and we sell to existing customers and pipeline is looking pretty good for that, and it’s also got technology that we embed in other things. So let’s say, it’s doing exactly what we expected to learn.

Kimberly A. Watkins – Morgan Stanley & Co. LLC

Okay, great. Any comment on penetration with existing customer base?

Robert Thomas

With our existing, I think of the 6,300 customers we have, about 500 of them, I think has NetMRI product, so that’s a very low penetration.

Kimberly A. Watkins – Morgan Stanley & Co. LLC

Okay. Got you. And then I wanted to drill into the geographic trends a little bit. It seemed like EMEA was particularly strong; a bit of a surprise, given what's going on in that region. So I wanted to see if you can point to any particular drivers there; and the converse for APAC. It seemed a little bit weaker.

Robert Thomas

Yes. The EMEA came in very strong as 27% growth quarter-over-quarter and when you take a look at all the regions that we have in EMEA, they’re all up. The largest increase that we had in EMEA were Northern Europe and Southern Europe and also Central Europe. So those are up substantially, there is we feel that there is more year-end purchasing occurring in EMEA than other regions and if you take a look at where we work in the January quarter last year from a revenue perspective, EMEA grew substantially also in that quarter, January quarter last year. We had couple of deals that acceptance clauses that we had shipping prior quarters that we recognize revenue in the January quarter and also we thought that the win rates gets our competitors what was better in the January quarter than it has been in the past.

APAC, similar to EMEA was up in all regions. There is one region that was not up and that was Australia. So all the other regions were up fairly substantially in APAC. We expect APAC in Q3 to increase in the revenue and keep on going up.

Kimberly A. Watkins – Morgan Stanley & Co. LLC

Okay. And just a follow up on EMEA, what’s the relative contribution of those three parts of Europe that you mentioned?

Robert Thomas

I don’t have the exact amount, but I would say those three regions represent probably about 70% of EMEA.

Kimberly A. Watkins – Morgan Stanley & Co. LLC

Okay, on a combined basis. And then last question is, in looking at your guidance for the next two quarters it’s basically you gave – implied in the full-year number. It looks like you're expecting continued strength in both of those quarters, although a little bit softer from this quarter. Typically, you guys have been pretty conservative or prudent in your guidance approach. So wanted to just touch based on what is it that you see that’s getting you excited? Is it the pull-through rate of recent trials? Is it the competitive environment uptake of the new appliance line, whatever? If you can provide some color, it would be helpful. Companies.

Robert Thomas

I think it’s across the couple of areas. I think we are seeing Europe pick up a little and I think we said two or three quarters ago that we would expect Europe to be a little flattish for few quarters and then we will start to see an uptick and I think we are starting to see that, a very good up tick this quarter. It won’t be quite the same next quarter, but we are seeing Europe come alive a little now I think.

We are experiencing as we said earlier, quite a lot of awareness around DDI and its importance to network stability, reliability, and security and so on. So that’s the awareness of the importance of DDI and the role it plays is increasing and that’s hoping us get more customers and have opportunities. I think we are doing some good things on the marketing front. I think we’ve redesigned our website, we have changed our messaging, we’re being a bit more intelligent about how we go and generate leads and opportunities and we’ve seen progress on that front too. So all the way around I think we are seeing good signs on all areas of the business. There is interest, there is quite a few perspective customers, their – that pipelines looking very healthy, so it’s just a general feeling on any front.

Kimberly A. Watkins – Morgan Stanley & Co. LLC

Okay, that’s really interesting. Thank you so much.

Robert Thomas

Thank you.

Operator

We have a question from Amitabh Passi with UBS. Please go ahead.

Amitabh Passi – UBS Securities LLC

Hi. Congrats on a good quarter, guys. Just a couple from me. Robert how should we think about the DDI penetration at this stage in the marketplace? I mean do you have any sense – I think previously you have talked about a $6 million term. I just want to revisit how you would think about sort of the penetration in the market today.

Robert Thomas

I think still very low even in our own customer base. As you know, I think if you took out maintenance renewal bookings from quarter and look to just pure product and new maintenance, a large percentage of that is from existing customers coming back and buying more. So even in their own customer base, we are quite under penetrated. There is a lot of room for opportunity in the customers that know and love us today. Not just with more DDI to expand the networks, but with new products like security, and so on that we’re introducing.

And then we talked before about maybe is 100,000 or few more appliances in the world today and the whole market that have been sold to customers in the DDI space and there are many millions of service doing this. So the market penetration generally is very low and even to our own basis, very low. So there is a lot of road way to go I think.

Amitabh Passi – UBS Securities LLC

And how do you drive further penetration? Is it purely a focus on your sales and marketing initiatives? I'm just trying to understand how you can accelerate adoption in the marketplace.

Robert Thomas

Well, I think there are two fronts I guess so we can drive acceleration. One is, how do we drive company acceleration which just doesn’t depend necessarily on the marketplace. We have 6300 customers or so today and we are introducing new products that none of those customers has. So we can drive acceleration little bit more easily into our own customer base with new products like the securities products that we mentioned today. And so that’s an opportunity for us.

And then I think on the marketing front, as I said there is gaining awareness of this is important and we just need to continue to exploit that. We need to promote that through events and through marketing literature and but it’s becoming a little easier because over time we’ll see a shift on how we generate leads. Today, we generate two thirds of them, but I am going and educating people that sort of come to us. We will see that trend shift over the next few quarters. I think, we have more come to us and we have to generate a lot of proportion.

So it’s about marketing, it’s about awareness. If that customer is telling the stories on why they brought the product and is about to using new products for an existing fairly large base.

Operator

The final question is from the line of Erik Suppiger with JMP Securities. Please go ahead.

Erik Suppiger – JMP Securities

Hi, Congratulations on a good quarter. On the sales and marketing, you didn't see a lot of leverage, given the strengths in the revenues. Where do you think you are from a leverage perspective across your channel partners?

Robert Thomas

I think because DDI [echo] business is still a relatively technical cell, as channel provides a lot of demand creation activity and a lot of lead generation activity. And that channel is becoming more confident in selling product on their own, and we’re seeing that actually quarter-by-quarter. So the channel is becoming more educated as I would have produced more business with less effort from us, but it’s still quite a technical sound. So we still get involved in quite a lot, if not most of the channel deals. I think the opportunity for early leverage for the channel will come out of the security kind of products that we just announced.

I would say more than half of that channel has a security practice as well. And so they understand the security market extremely well and then talking to a few channel partners when we launched the two security products, there was a lot of interest around how they would use that to take to their existing customer base, and provide a more complete security solution than a bit of many security solutions. So I think we are likely to see channel leverage come more quickly in the new products for introducing, because they have a security practice today and they have a customer base that that sell security products to and they understand it much better.

Erik Suppiger – JMP Securities

Are you investing a lot in training with your not the security, but the traditional products, are you getting the channel more versed in driving more of the process themselves?

Robert Thomas

We have the whole channel organization whose whole drove in line is to prepare the channel to sell more product. And so that’s around helping them with programs, helping them with promotions, training them, certifying engineers that understand the product, so that they can go and explain that more easily to their customers as well. So it’s quite a bit invested in a channel group who have this whole combination of things; training, promotion, professional services, train the channel to do the professional services today.

Erik Suppiger – JMP Securities

Okay. On the government front, how much you – I think you had said that your government business is in the low teens, how much of that is federal? And in light of the fiscal concerns in the federal space, do you see that business performing well as we go forward or how are you looking at your federal business?

Robert Thomas

We don’t really right figures out from the rest of the government business. As Remo said, government is in the low teens. We have seen relatively healthy activity in the federal government at the moment. I don’t expect that to change much the fact that we have common criteria certified gives us an advantage over other people in the space, and you have to remember that one of the reasons people buy us is for more effective efficiencies in the network. We are running networks better through automation, use less people and put those people to work somewhere else. So in a tight dollar environment, sometimes that can work a little bit to their advantage because we hope it will save money.

The other thing is, security is a big issue, especially in government networks these days and those have to read the paper last week or so about hackers from overseas getting into networks, and people becoming very security conscious. So the ability to secure your network better and run it on the lower OpEx, things that we do. So I think we will continue to grow in government and I can’t see us worrying too much in the near term about reduced government spending.

Erik Suppiger – JMP Securities

Has your government business have been at the same level in the low teens for some time or has that moved up or down?

Remo Canessa

It’s been there for sometime. It’s certainly on a quarter-to-quarter basis and it remain relatively flat in the last two quarters.

Erik Suppiger – JMP Securities

Very good. Congratulations, thank you.

Remo Canessa

Thank you.

Robert Thomas

Thank you.

Operator

There are no further questions please continue.

Jane Underwood

Okay, I would like to thank you for joining us on today’s call, a replay will be made available at 800-475-6701 beginning on February 21, 2013 at 4 PM Pacific and an audio archive will also be available on our website. Have a great day and we look forward to speaking with you again soon. Thank you.

Robert Thomas

Thank you.

Operator

That does conclude our conference for today, thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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Infoblox (BLOX): FQ2 EPS of $0.06 beats by $0.02. Revenue of $54.4M (+32% Y/Y) beats by $3.07M. Shares +10% AH. (PR)